Sun Micro sees growth with AMD

SAN FRANCISCO (CBS.MW) -- Sun Microsystems chief Scott McNealy said Monday that the company's new partnership with Advanced Micro Devices would spur sales growth by providing customers with a better choice of server technologies.

Speaking at the annual Comdex computing industry convention in Las Vegas, McNealy formalized a partnership in which Sun will develop new servers that run on Opteron x86 microprocessors made by AMD
AMD, +1.47%
The move is intended to give the two struggling companies extra leverage in an industry where servers running on chips designed by Intel
INTC, -0.68%

Intel has eroded the market for high-end servers that run on Sun's own UltraSparc chip technology and the Unix operating system, a bread-and-butter revenue source for Sun.

"We were late to the x86 game," McNealy said. "But we're the first rock-and-roll application on Opteron. It will help x86 and it says we're serious."

McNealy said that with the addition of the Opteron chips, Sun is "setting a new standard by delivering even more choice and performance to our customers."

In keeping with Sun's mantra of choice, Sun said the new Sun Fire servers would come with versions of the company's proprietary Solaris operating system and Java, and the open-source Linux operating system. The new devices are slated to be released throughout 2004.

Market reaction was tepid Sun's shares fell 2 cents to close at $4.08 and AMD
AMD, +1.47%
gave up 50 cents to close at $17.36.

Analysts say the partnership is crucial to both Sun and AMD as both companies have been under financial and industry pressure from investors and larger competitors. The Opteron chips, which include both 32-bit and 64-bit processors, give Sun a new weapon to fight against competitors that have gained popularity at the expense of larger, more expensive processors that are common in Sun's Unix products. For AMD, the world's No. 2 semiconductor company gains another outlet in the server market to go along with an existing partnership with IBM
IBM, +0.46%

"The 32-bit processors are the fastest-growing segment of the server market," said Brent Bracelin, of Pacific Crest Securities. "Sun is the leader in Unix, but that's becoming more and more of a niche market."

Research firm IDC's most-recent server figures show just how Sun is fighting for market share. In the second quarter of 2003, Sun's server revenue totaled $1.43 billion-almost 19 percent less than the $1.76 billion it recorded in the year-ago period. However, Sun still managed to hold on to the No. 3 overall spot in server revenue, trailing IBM and Hewlett-Packard
HPQ, +1.47%
and Jean Bozman, an IDC research vice president, said that position still makes Sun an attractive technology and business partner.

"I think it's a win-win for both companies," Bozman said. "Sun is looking to grow and needed to look at ways to expand into the market, and AMD develops another relationship for Opteron with one of the top server vendors."

Not all industry watchers were sold on the AMD partnership as being a cure-all for all of Sun's ills, which have led to growing losses and some speculation that layoffs could be in the works. In October, the company posted a first-quarter net loss of $286 million, or 9 cents a share, on sales of $2.54 billion. The loss more-than-doubled from the year-ago period when Sun lost $111 million, or 4 cents a share, with $2.75 billion in revenue.

Steve Milunovich, of Merrill Lynch, said in a research note that working with AMD may be necessary, but is not sufficient itself to turn things around for Sun.

"The (AMD) chip doesn't drive sales," Milunovich said. "Differentiating on a chip, even if it results in somewhat better server performance, will not be easy. The long-term picture still appears unfavorable."

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